The Government confirmed on 26 March 2002 that the new chargeable gains exemption regime for substantial shareholdings held by companies will apply for disposals on or after 1 April 2002. However, just five days before the new regime comes into effect, revised draft legislation has been published containing a number of key changes from the proposals published in November 2001.
Most of the changes are welcome relaxations adopted as a result of the consultation process. Unfortunately, there is a sting in the tail - a new and potentially widely applicable anti-avoidance rule. It should be noted that the legislation is still not yet in final form: it will form part of the Finance Bill 2002, which will not be enacted until the summer.
Threshold now 10%
The threshold for a substantial shareholding has been reduced from 20% to 10%. The special threshold for life insurance companies has been reduced from 40% to 30% and the minimum qualifying threshold for interests in joint venture companies has been reduced from 30% to 10%.
The other requirements applying to the substantial shareholding remain the same. In particular:
the shareholding must represent at least 10% of the ordinary share capital of the company being sold (referred to in the legislation as "the investee company") and give a right to at least 10% of the profits and 10% of the assets available for distribution to equity holders. Schedule 18 ICTA 1988 applies for these purposes;
the shareholding must have been held for a continuous period of 12 months falling at any time within the two years prior to the disposal; and
all shares held by members of a group are aggregated and intra-group disposals, stocklending and repos are looked through.
Changes to definitions of trading company, trading group and trading activities
The meaning of these expressions is key to the scope of the exemption. As before, in order for the exemption to apply, the vendor company must be either a single trading company or a member of a trading group and the company being sold must be either a trading company or the holding company of a trading group. A trading company or a trading group exists where, broadly, the company (or group) carries on trading activities and the company's (or the group's, as appropriate) activities do not include to a substantial extent activities which are not trading activities. A number of changes have been made which broaden, or in some cases, clarify these expressions: